🧩 What Is It?
Comparable valuation analysis involves finding companies similar to the one you’re trying to value—based on size, industry, growth, geography, etc.—and using their market metrics to estimate your target company’s value.
📊 Key Steps in Comparable Valuation Analysis
1. Select Peer Companies
Choose companies that are as similar as possible in terms of:
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Industry
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Business model
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Size (revenues, EBITDA)
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Growth prospects
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Geography
2. Gather Financial Data
For each peer, collect key financial figures:
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Revenue
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EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
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Net income
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Market capitalization
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Enterprise value (EV)
3. Calculate Multiples
You compute valuation multiples, such as:
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EV/EBITDA
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EV/Revenue
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P/E (Price/Earnings)
These ratios help normalize across companies of different sizes.
4. Apply the Multiples to the Target
Use the median or average multiple from the peer group and apply it to your target’s financials. For example:
Target EV = Target EBITDA × Median (EV / EBITDA)
5. Adjust for Outliers and Context
Account for any differences in growth, profitability, or risk that might justify a premium or discount relative to peers.
🧠 Why Use It?
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Market-based: Reflects current market sentiment.
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Fast and practical: Often quicker than a full DCF (Discounted Cash Flow) analysis.
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Benchmarking: Good for sanity-checking other valuation methods.
⚠️ Limitations
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No two companies are identical: Differences in capital structure, growth, or risk make direct comparisons imperfect.
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Market inefficiencies: The comps might be overvalued or undervalued.
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Short-term bias: It reflects current market conditions, which can be volatile.
